BILL ANALYSIS Ó AB 556 Page 1 Date of Hearing: April 21, 2015 ASSEMBLY COMMITTEE ON PRIVACY AND CONSUMER PROTECTION Mike Gatto, Chair AB 556 (Irwin) - As Amended April 7, 2015 SUBJECT: Trusts: regulation and enforcement SUMMARY: Expands the definition of a "commercial fundraiser for charitable purposes" in order to strengthen the Attorney General's (AG) ability to enforce disclosure requirements for charity fundraisers, and establishes a ten-year statute of limitations for enforcement actions against charity fundraisers, consultants and other third parties who engage in fraud or prohibited conduct. Specifically, this bill: 1)Expands the definition of "commercial fundraiser for charitable purposes" to include any person or entity that plans, manages, advises, counsels, consults, or prepares material for, or with respect to, the solicitation of funds, assets, or property for charitable purposes and is compensated by a percentage interest in the funds, assets, or property received through a solicitation campaign, rather than by a flat fee. 2)Expands the definition of "commercial fundraiser for charitable purposes" to include any person or entity that plans, manages, advises, counsels, consults, or prepares material for, or with respect to, the solicitation in this AB 556 Page 2 state of funds, assets, or property for charitable purposes and: a) Has any ownership or management interest in any other entity that receives or controls the funds, assets, or property solicited for charitable purposes; or b) Receives any material financial benefit, directly or indirectly, from any other individual or entity that receives or controls the funds, assets, or property solicited for charitable purposes, other than the nonprofit soliciting the funds, assets, or property for charitable purposes. 3)Exempts from the definition of "commercial fundraiser for charitable purposes" certain specified individuals, including, among others, trustees; charitable corporations; employees or agents of commercial fundraisers, and any attorney, investment counselor, or banker who in the conduct of that person's profession advises a client when actually engaged in the giving of legal, investment, or financial advice. 4)Clarifies that any person or entity who indirectly maintains an interest in an escrow account into which solicited funds are deposited, or who indirectly maintains access of the right to access funds, assets, or property received by a caging (i.e., direct mail fundraising) company as a result of a solicitation, falls under the definition of "commercial fundraiser for charitable purposes." 5)Establishes a 10-year statute of limitations for the AG to bring a civil action to enforce this Act, as well as to enforce existing anti-fraud statutes under Civil Code Sections 2223 and 2224. AB 556 Page 3 6)Provides that specified disclosures about fundraising counsel that entities that solicit funds for charitable purposes with the participation of fundraising counsel must make at the time of solicitation shall be clear and conspicuous and appear in at least 12-point type, if printed or presented electronically. EXISTING LAW: 1)Governs charitable corporations, trustees, commercial fundraisers, fundraising counsel and commercial co-venturers who solicit or hold property for charitable purposes through the Supervision of Trustees and Fundraisers for Charitable Purposes Act (Act), and generally provides the AG with supervisory and enforcement powers over these entities. (Government Code Section (GC) 12580 et seq.) 2)Requires commercial fundraisers and fundraising counsel, both as defined, to register with the AG's Registry of Charitable Trusts and to file an annual financial report of funds solicited on behalf of each charitable purpose or organization. (GC 12599, 12599.1) 3)Defines "commercial fundraiser for charitable purposes" to mean any individual, corporation, unincorporated association, or other legal entity, except as specified, who for compensation does any of the following: a) Solicits funds, assets, or property in this state for charitable purposes; b) As a result of a solicitation of funds, assets, or property in this state for charitable purposes, receives or controls the funds, assets, or property solicited for charitable purposes; or AB 556 Page 4 c) Employs, procures, or engages any compensated person to solicit, receive, or control funds, assets, or property for charitable purposes. (GC 12599(a)) 4)Requires, not less than 10 working days prior to commencement of each solicitation campaign, the filing with the AG's Registry of Charitable Trusts of a notice setting forth, among other things, the person responsible for directing and supervising the work of the commercial fundraiser under the contract and the fundraising methods to be used. (GC 12599(h)) 5)Requires a written contract between commercial fundraisers and charities for each solicitation campaign or event containing, among other things, a statement of charitable purposes of the campaign or event; if the commercial fundraiser is to be paid a fixed fee, a statement of the fee and a good faith estimate of what percentage the fee will constitute of the total collections; if the commercial fundraiser is to be paid a percentage fee, a statement of the percentage of contributions that the charity will receive; a requirement that all funds in the control or custody of the commercial fundraiser be deposited into the charity's bank or delivered to the charity within five working days of receipt; and specified contract termination provisions. (GC 12599(i)) 6)Defines "fundraising counsel for charitable purposes" to mean any individual, corporation, unincorporated association, or other legal entity, except as provided, who is described by all of the following: a) For compensation plans, manages, advises, counsels, AB 556 Page 5 consults, or prepares material for, or with respect to, the solicitation in this state of funds, assets, or property for charitable purposes; b) Does not solicit funds, assets, or property for charitable purposes; c) Does not receive or control funds, assets, or property solicited for charitable purposes in this state; and d) Does not employ, procure, or engage any compensated person to solicit, receive, or control funds, assets, or property for charitable purposes. (GC 12599.1(a).) 7)Requires fundraising counsel for charitable purposes to file annually with the AG, a report listing each person, corporation, unincorporated association, or other legal entity for whom the fundraising counsel has performed any specified services, and a statement certifying that the fundraising counsel had a written contract with each listed person, corporation, or other legal entity that complied with specified requirements. (GC 12599.1(d)) 8)Requires a written contract between a fundraising counsel for charitable purposes and a charitable organization for each service to be performed by the fundraising counsel for the charitable organization that shall be available for inspection by the AG. (GC 12599.1(f)) 9)Requires any individual, corporation, or other legal entity who for compensation solicits funds or other property in this state for charitable purposes to disclose prior to an oral AB 556 Page 6 solicitation or sales solicitation made by direct personal contact, radio, television, telephone, or over the Internet, or at the same time as a written solicitation or sales solicitation that a) the solicitation or sales solicitation is being conducted by a commercial fundraiser for charitable purposes, and b) the name of the commercial fundraiser for charitable purposes as registered with the AG. (Business and Professions Code Section 17510.85) 10)Provides for a 10-year statute of limitations for any action brought by the AG against trustees or other persons holding property in trust for charitable purposes or against any charitable corporation or any director or officer thereof to enforce a charitable trust or to impress property with a trust for charitable purposes or to recover property or the proceeds thereof for and on behalf of any charitable trust or corporation. (GC 12596) FISCAL EFFECT: Unknown COMMENTS: 1)Purpose of this bill . This bill is intended to strengthen the AG's ability to regulate charity fundraising campaigns by closing a loophole in current law that allows third party fundraisers hired as so-called "fundraising counsel" to avoid disclosures about their fees that are currently required of commercial fundraisers. The bill also strengthens the AG's enforcement powers by extending the statute of limitations for enforcement actions against charity fundraising firms and other third parties who engage in fraud or prohibited conduct. This measure sponsored by Attorney General Kamala Harris. 2)Author's statement . According to the author, "Existing law regulates for-profit companies that raise money on behalf of a AB 556 Page 7 charity but keep a portion of the money raised as profit. Companies that raise money on behalf of charitable organizations, known as commercial fundraisers, are required to disclose to donors that a paid professional fundraiser was involved in the solicitation campaign. 'Fundraising counsel,' persons or entities that plan, manage, or advise charities on their charitable solicitations activities and receive a portion of the funds raised, are not subject to the same transparency requirements. In the recent charity enforcement case brought by the AG's Charitable Trusts Section, People v. Help Hospitalized Veterans, the cost of charitable fundraising was 65 to 72 percent of the gross annual revenue received from donors. Because the professional fundraisers were classified as 'fundraising counsel,' Help Hospitalized Veterans was not required to disclose to donors that paid professional fundraisers were involved in the solicitation campaigns." 3)Charitable fundraising and AG oversight . According to the 2014 Causes Count report by CalNonprofits, there are more than 70,000 active 501(c)(3) public charities in California. California's charitable organizations contribute 15 percent of California's Gross State Product and employ nearly 1 million people. Nonprofits are also generally highly trusted institutions, with over 80 percent of Californians surveyed by the Causes Count report stating that they are confident that nonprofits act on the public's behalf and deliver quality services. The AG is responsible for regulating charities and the professional fundraisers who solicit on their behalf. All charitable trustees and fundraising professionals are required to register and file annual financial disclosure reports with the Registry of Charitable Trusts in the AG's office before soliciting in California. The attorneys and auditors of the AG's Charitable Trusts Section investigate and bring legal AB 556 Page 8 actions against charities, their officers and directors, and fundraising professionals that misuse charitable assets or engage in fraudulent fundraising practices. 4)Expanded definition of "commercial fundraiser for charitable purposes ." This bill revises the definition of "commercial fundraiser for charitable purposes" to ensure that companies soliciting charitable donations as "fundraising counsel" must register as commercial fundraisers. For-profit companies that solicit money on behalf of charitable organizations but keep a portion of the money raised as profit are currently regulated as "commercial fundraisers." Commercial fundraisers have to register with the AG, must identify themselves to donors by their registered name, and must explain to donors that the charitable solicitation is being conducted by a commercial fundraiser. By contrast, "fundraising counsel" which help plan, manage, or advise charities on their charitable solicitations but do not directly engage in solicitations are currently not subject to the same disclosure requirements. According to the author, recent AG enforcement cases revealed instances in which professional fundraisers who registered as fundraising counsel rather than as commercial fundraisers in order to avoid disclosing their identity to donors. This bill revises the definition of "commercial fundraiser for charitable purposes" to include an individual or business that plans, manages, counsels, advises, or prepares material for the solicitation of funds for charitable purposes if the fee arrangement with the charity gives the person or business a percentage of the funds raised - even if the fundraiser neither directly solicits donors nor holds any funds raised through the fundraising activities conducted. According to the author's office, this will close the loophole in current law and give the AG the ability to better protect the public from charitable fundraising fraud. 5)Extension of statute of limitations . This bill extends the statute of limitations for enforcement actions against charity AB 556 Page 9 fundraising firms and other third parties who engage in fraud or prohibited conduct. While the AG has 10 years to bring enforcement actions against trustees, officers, or directors of a charitable organizations for fraud or other violations, that 10-year statute of limitations does not extend to third party fundraisers, consultants, or accountants. Instead they are subject to either a three or four year statute of limitations, depending on the cause of action. According to the author's office, in a recent case, the AG was unable to bring an action for fraud against the persons registered as "fundraising counsel" because the three-year statute of limitations had passed. This bill establishes a 10-year statute of limitations for all persons or entities involved in the fraud in order to be consistent with the 10-year statute of limitations that applies to fraud cases involving directors and officers of a charity. 6)Recent Amendments . Recent amendments to the bill removed opposition by charities and nonprofit organizations. The Direct Marketing Association (DMA) states it has proposed some "non-substantive, clarifying amendments" to address its minor remaining concerns. 7)Double-referral . This bill was double-referred to the Assembly Judiciary Committee, where it was heard on April 14, 2015, and passed on a 10-0 vote. REGISTERED SUPPORT / OPPOSITION: Support California Department of Justice AB 556 Page 10 Wounded Warrior Project, Inc. Opposition None received. Analysis Prepared by:Jennie Bretschneider / P. & C.P. / (916) 319-2200